Introduction to Personal Finance Test
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Course Introduction
Introduction to Personal Finance equips students with the foundational knowledge and practical skills necessary to effectively manage their financial resources throughout life. Covering core topics such as budgeting, saving, investing, credit management, insurance, and retirement planning, the course emphasizes informed decision-making and responsible financial behavior. Through real-world scenarios and interactive exercises, students will develop strategies to set financial goals, create and follow a budget, evaluate different banking and investment options, and understand the impact of personal financial choices on their long-term well-being.
Recommended Textbook
Personal Financial Planning 1st Edition by Lewis Altfest
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Page 2
Chapter 1: Introduction to PFP
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Sample Questions
Q1) Which of the following best defines household finance?
A) The study of how a household and the people in it develop the cash flows necessary to support operations and provide for the well-being of its members.
B) The study of how much it costs to purchase a home.
C) The study of how a household and the people in it can minimize the risk of bankruptcy.
D) The study of how the number of people in a household can be maximized.
E) The study of how a household and the people in it limit expenditures and maximize cash inflows.
Answer: A
Q2) Which of the following are not considered part of the financial plan?
A) Tax planning
B) Investment planning
C) Capital budgeting
D) Risk Management
E) Employee benefits
Answer: C
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Page 3
Chapter 2: Time Value of Money
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Sample Questions
Q1) You are given the choice between receiving $100,000 today or $100,000 in one year. Which of the following statements is accurate?
A) You would prefer to receive $100,000 today, as you could invest the money and in one year have much more than the original $100,000.
B) You would prefer to receive $100,000 today, as the present value of receiving $100,000 in one year is much less than $100,000.
C) You would prefer to receive $100,000 today due to the time value of money.
D) All of the above statements are accurate.
E) None of the above statements are accurate.
Answer: D
Q2) David is interested in an investment that would supply him with $200 at the end of year 1, $300 at the end of year 2, $400 at the end of year 3, $500 at the end of year 4, and $1,600 at the end of year 5. How much should David pay for this investment if he wants to earn 10 percent on his investment? How does you answer change if he wants to earn 5%?
Answer: David should pay $2,065.26 is he wants to earn 10%, and $2,473 if he wants to earn 5%. The calculations are as follows: 11ea8557_16d7_c625_a343_03af8a913237_TB1390_00
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Chapter 3: Beginning the Planning Process
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Sample Questions
Q1) What is empathy?
A) Speaking positively about another person's strongly held beliefs.
B) Believing that you can rely on another person to perform as expected.
C) Trying to place oneself in another person's position.
D) Trying not to be judgmental about another person's position.
E) None of the above.
Answer: C
Q2) If clients show resistance to the financial planner's advice, the financial planner may:
A) Try to persuade the clients that their ways of viewing the matter aren't accurate.
B) Change the advice.
C) Try to persuade the clients that their ways of viewing the matter aren't in their interest.
D) All of the above.
E) None of the above.
Answer: D
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5
Chapter 4: Household Finance
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Sample Questions
Q1) A household's sharing of fixed costs for shelter and other goods is an example of:
A) Reduction in income fluctuation.
B) Specialization of task.
C) Economies of scale.
D) All of the above.
E) None of the above.
Q2) The method by which people select goods and services to satisfy their needs is:
A) The theory of market selection.
B) A mechanical process.
C) The theory of household finance.
D) The theory of consumer choice.
E) None of the above.
Q3) What is the goal of a household?
A) To earn as much money as it can.
B) To maximize utility.
C) To identify and manage revenues and expenses.
D) All of the above.
E) None of the above.
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Chapter 5: Financial Statements Analysis
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Sample Questions
Q1) What are operating activities?
A) The cash left over after our operating, capital expenditure, and debt activities.
B) Outlays on household related matters that provide benefit beyond the current year.
C) The day-to-day financial functions of the household.
D) Additions or subtractions from debt.
E) None of the above.
Q2) Why are retirement assets listed separately on the balance sheet?
A) Retirement assets often cannot be turned into cash immediately without penalty.
B) Normal withdrawals from pensions are taxable.
C) Normal withdrawals from pensions are nontaxable.
D) Retirement assets have low cash value relative to their face amount.
E) Both a and b above.
Q3) How are each of the following items recorded according to GAAP business?
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Chapter 6: Cash Flow Planning
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Sample Questions
Q1) Please list and describe eight different reasons for savings.
Q2) What is the pure life cycle motive?
A) To take advantage of investment opportunities that can make achievement of our financial goals easier.
B) To provide monies for the down payment or full purchase of longer-lived assets such as durable goods or educational expenditures.
C) To provide monies to even out differences in earnings over time.
D) To provide a fund to cover future uncertainties such as fluctuating income, sickness, inflationary effects on expenditures, etc.
E) To sacrifice today so that your future lifestyle can improve.
Q3) The capacity to find a seller or buyer of an asset at its current value is:
A) Liquidity.
B) Liquidity substitute.
C) Marketability.
D) Emergency substitute.
E) None of the above.
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Chapter 7: Debt
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Sample Questions
Q1) Which of the following best describes unrationed borrowers?
A) Borrowers that have sufficient internal cash flow and assets to be able to select the loan maturity offering the most attractive rates.
B) Borrower that are short of internal cash flow and would like to borrow more credit at comparable interest rates than is available.
C) Borrowers that are allowed to borrow as much money as they wish, as they are in the lowest risk class.
D) None of the above.
E) Both b and c.
Q2) A loan that provides a loan limit which can be utilized for multiple purchases over time is:
A) Closed end retail credit.
B) Open end credit.
C) Exemplified by an auto loan.
D) Both b and c.
E) None of the above.
Q3) For each of the following types of debt, please indicate whether the debt is (a) tax deductible and (b) secured.
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9
Chapter 8: Non Financial Investments
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Sample Questions
Q1) Project A has NPV of $45 million while project B has NPV of $54.5 million. If the cost of project A is $33 million and the cost of project B is $22 million, which project should be chosen if only one can be chosen?
A) Project A.
B) Project B.
C) Neither.
D) Both.
E) Answer varies, depending on inflation.
Q2) The sum of real estate taxes, insurance, and interest and principal payments on a mortgage should not exceed:
A) 14 percent of your total income.
B) 42 percent of your total income.
C) 28 percent of your total income.
D) 36 percent of your total income.
E) None of the above.
Q3) What factors influence home affordability and whether the purchase of a home is realistic? For each, provides details as to why it is included on the list.
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10
Chapter 9: Financial Investments
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Sample Questions
Q1) The expected rate of return is equal to:
A) The risk free rate divided by the risk premium.
B) The risk free rate minus the risk premium.
C) The risk premium minus the risk free rate.
D) The risk premium divided by the risk free rate.
E) None of the above.
Q2) How does standard deviation differ from semi-variance?
A) Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in losses.
B) Standard deviation includes fluctuations that result in both gains and losses while semi-variance only measures fluctuations resulting in gains.
C) Semi-variance includes fluctuations that result in both gains and losses while standard deviation only measures fluctuations resulting in losses.
D) Semi-variance includes fluctuations that result in both gains and losses while standard deviation only measures fluctuations resulting in gains.
E) None of the above.
Q3) Please list and explain nine strengths associated with mutual funds.
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11
Chapter 10: Risk Management
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Sample Questions
Q1) Which of the following is not a strength associated with a whole life policy?
A) The premiums remain level over time and thus aren't unaffordable in later years.
B) Higher payments than needed to cover mortality risk are an effective "forced savings" component for those who need it.
C) The policy is designed to commonly pay a cash benefit to the beneficiary in contrast to term's less frequent payout as temporary insurance.
D) All of the above are strengths associated with a whole life policy.
E) None of the above is a strength associated with a whole life policy.
Q2) What are search costs?
A) Costs that the person desiring to be insured undertakes to find out which policy is best.
B) Costs that the insurance company incurs to attract clients.
C) The costs that the insured individual incurs when attempting to collect cash from the insurance company.
D) Overhead costs.
E) None of the above.
Q3) Please list and describe eight risk management approaches.
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Chapter 11: Other Insurance
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Sample Questions
Q1) Which of the following is not a method of coinsurance?
A) Instituting exclusions and waiting periods.
B) Instituting risk minimization techniques.
C) Prespecified limits.
D) Use of group policies.
E) All of the above are methods of coinsurance.
Q2) Which of the following homeowner's policies covers the most risk?
A) HO1.
B) HO2.
C) HO3.
D) All of the above cover equal risk.
E) None of the above.
Q3) When losses are material and there is a strong likelihood that they will occur:
A) Insurance may not be the appropriate choice.
B) Insurance is always prudent.
C) Overhead costs are lower.
D) Insurance companies will refuse to provide insurance.
E) None of the above.
Q4) Please list the type of dwelling and type of coverage associated with the eight types of homeowner's policies.
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Chapter 12: Retirement Planning
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Sample Questions
Q1) Which of the following is a weakness of a traditional annuity?
A) You cannot outlive your annuity payments.
B) A payout guarantee from a company which itself is subject to bankruptcy risk.
C) Lack of liquidity once you annuitize.
D) Both a and b.
E) Both b and c.
Q2) The Employee Retirement Income Security Act:
A) Requires that employers act as fiduciaries managing investment assets in the employee's best interests.
B) Requires that employees act as fiduciaries managing investment assets in the employer's best interests.
C) Guarantees pension assets or income when companies go bankrupt.
D) Guarantees pension assets but not income when companies go bankrupt.
E) None of the above.
Q3) Bob and Dave each started with $130,020. They retired, and both took out $6,500 of their money at the end of each year and spent it. Bob had 32 percent declines in his assets in year 2 whereas Dave's occurred in year 3. They both had a 7 percent increase per year in their assets in the remaining years. Assuming no tax impact, what sums did each have at the end of each year for each of the four years following retirement?
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Page 14
Chapter 13: Educational Planning
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Sample Questions
Q1) For which of the following educational saving alternatives is there an age limitation for use?
A) Series EE.
B) Coverdell education savings.
C) 529 plans.
D) All of the above.
E) None of the above.
Q2) What is the overall goal of educational planning?
A) To provide the highest quality education possible regardless of costs.
B) To choose the education that enables the recipient to minimize educational costs.
C) To provide a quality education that enables the recipient to receive a high return on investment.
D) To provide the least education possible for a given return on investment objective.
E) None of the above.
Q3) What are the steps in the educational policy statement process?
Q4) Please list and explain seven basic financial literacy principles.
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Page 15
Chapter 14: Tax Planning
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Sample Questions
Q1) Which of the following is not one of the standard deductions on the tax planning statement?
A) Deductible medical and dental expenses.
B) Deductible taxes.
C) Deductible interest.
D) Deductible deposits.
E) All of the above are standard deductions on the tax planning statement.
Q2) Which of the following is not a factor that can lead to your marginal tax bracket varying from year to year?
A) Fluctuations in income earned.
B) Unusually high or low deductible expenses.
C) A change in the country's taxation methods or tax brackets.
D) All of the above are factors that can lead to your marginal tax bracket varying from year to year.
E) None of the above is a factor that can lead to your marginal tax bracket varying from year to year.
Q3) Please detail the principal components of the tax return.
Q4) Please list and explain eight tax planning strategies.
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Page 16
Chapter 15: Estate Planning
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Sample Questions
Q1) What are the fourteen steps of estate planning?
Q2) A bank account set up with the words "in trust for" or "trustee for" is:
A) A gift.
B) A trust.
C) Neither a gift nor a trust.
D) Both a gift and a trust.
E) None of the above.
Q3) What is the maximum federal estate tax in 2009?
A) 48%.
B) 47%.
C) 46%.
D) 45%.
E) None of the above.
Q4) Separate legal entities in which a third party manages property for the benefit of another person are:
A) Trustees.
B) Trustor.
C) Trusts.
D) Grantor.
E) None of the above.
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Chapter 16: Stocks, Bonds and Mutual Funds
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Sample Questions
Q1) Are U.S. Government bonds subject to federal and state taxes?
A) Yes.
B) No.
C) They are subject to state but not federal taxes.
D) They are subject to federal but not state taxes.
E) None of the above.
Q2) For which of the following is a bond's classification based on the likelihood that the bond will fulfill its obligation to pay interest and repay the amount owed at maturity?
A) Duration.
B) Risk.
C) Quality.
D) Credit.
E) None of the above.
Q3) Sales charges that are covered under marketing fees for loan funds are:
A) 12b-1 fees.
B) 12a-1 fees.
C) 10b-1 fees.
D) 10a-1 fees.
E) None of the above.
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Page 18
Chapter 17: Background Topics
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Q1) Which of the following provides regulatory services for securities traded in over-the-counter markets?
A) SEC.
B) NASD.
C) NYSE.
D) Both a and b.
E) Both a and c.
Q2) Giving up something that has value in return for an act or promise is:
A) Compromise.
B) Consideration.
C) Contract.
D) Offer.
E) Acceptance.
Q3) Which of the following is not required for a contract to be negotiable?
A) Written.
B) Signed by maker.
C) An unconditional promise to pay an exact amount of money.
D) Paid to a specific person or to anyone presenting the contract.
E) All of the above are required.
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Page 19
Chapter 18: Capital Needs Analysis
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Sample Questions
Q1) Rates of return should normally be expressed on an aftertax basis, which means that:
A) Returns on tax-sheltered pensions would be compounding at a different rate than personal sums.
B) Returns on tax-sheltered pensions would be compounding at the same rate as personal sums.
C) Returns are generally inaccurate.
D) Both a and b.
E) Both b and c.
Q2) To bring current cash shortfall to future period when performing retirement needs calculations, which of the following rates do we use?
A) Investment rate.
B) Inflation rate.
C) Real rate.
D) Both a and b.
E) Both b and c.
Q3) Please indicate whether Monte Carlo simulation and Total Portfolio Management includes each of the following:
Q4) Please list the 11 steps associated with a retirement needs analysis.
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Chapter 19: Behavioral Financial Planning
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Sample Questions
Q1) Which of the following best defines visceral feelings?
A) Human shortcomings that come from impulses to take action that are often short-term in nature and can cloud judgments.
B) Instinctive human behaviors that come from impulses to take action that are often short-term in nature and can improve judgments.
C) Human shortcomings that come from impulses to take action that are often long-term in nature and can cloud judgments.
D) Instinctive human behaviors that come from impulses to take action that are often long-term in nature and can improve judgments.
E) None of the above.
Q2) Which of the following statements is inaccurate?
A) Life goals are based on basic emotions and higher level feelings.
B) Life goals extend beyond traditional finance.
C) Life goals do not have a financial component.
D) All of the above statements are accurate.
E) All of the above statements are inaccurate
Q3) Please list and discuss seven methods that are helpful for maintaining control to achieve planned savings.
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Chapter 20: Completing the Process
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Q1) Which of the following observes the effect of changes in multiple variables or in one variable that influences many situations?
A) Scenario analysis.
B) Sensitivity analysis.
C) SWOT analysis.
D) All of the above.
E) None of the above.
Q2) For which of the following operating segments of the financial plan is the cash relationship characterized as an outflow?
A) Revenues.
B) Living costs.
C) Retirement planning.
D) Both a and b.
E) Both b and c.
Q3) Please list 8 distinguishing features of personal financial planning theory, and describe the benefit of each.
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